Black Economic Empowerment in South Africa

Indigenisation and irony

by Piet le Roux / November 5th, 2013

A decade has passed since President Thabo Mbeki’s consent to the Broad-based Black Economic Empowerment Act (53 of 2003). Also known as BBBEE, or simply BEE (if the prefix ‘Broad-based’ is dropped), the act has recently been amended and is set to be applied much more comprehensively from 2014 onward. As wonderful as ‘empowerment’ may sound, BEE comes with dire consequences for holders of property rights and for the overall South African economy. Moreover, the act is ironic because, despite its name, it is patently harmful to the vast majority of black South Africans.

Ostensibly, the act is meant to “increase broad-based and effective participation of black people in the economy, promote a higher growth rate, increased employment” and more. But when studying the act and its accompanying ministerial regulations – the so-called BBBEE Codes of Good Practice – it quickly becomes evident that, at its heart, BEE is a policy of redistribution of capital ownership from some white people to some black people.

Unfortunately, BEE is alarmingly similar to what has been known in Zimbabwe as “indigenisation” – a race-based expropriation and redistribution process implemented with dire consequences by the government of President Robert Mugabe. So similar it is, in fact, that when Business Day, a premium South African business daily, ran an article on a forced indigenisation deal for Impala Platinum in Zimbabwe in January 2013, it used the terms BEE and indigenisation interchangeably, even though officially there is no such thing as BEE in Zimbabwe.

In November 2012, Trade and Industry minister Rob Davies, promoting BEE, even remarked that “we need to make sure that in the country’s economy, control, ownership and leadership are reflective of the demographics of the society in the same way the political space” is. His words could just as well have been used by his Zimbabwean counterpart.

However, unlike indigenisation, South Africa’s BEE is not compulsory. On the surface of it, BEE is a voluntary undertaking.

Companies who participate can apply for BEE verification and will receive a BEE score based on their compliance with regulations specified by Trade and Industry Minister Rob Davies. Broadly speaking, part of the score is made up of how much of its inputs the company sources from BEE-compliant suppliers and part of the score comes from how much of the company is under control of people who are not white.

Whenever a company wishes to solicit business from any branch of government – be it in construction, catering, transport, etc. – its BEE score will have a material influence on the likelihood of obtaining any state contract. Because part of a company’s BEE score will be calculated based on the BEE scores of its upstream suppliers, all companies have an incentive to discriminate between its suppliers based on BEE scores.

While nothing about having a low BEE score is prosecutable, there should be no doubt that a low BEE score is not without consequences to a company’s bottom line. Far from being a purely voluntary undertaking for companies who wish to deal with the state, BEE is actually set up in a way that weaves penalisation of non-BEE compliant organisations right through the economy. Lest they risk becoming low BEE-scoring organisations – and face being relatively less attractive suppliers – all companies who wish to participate in the South African economy faces a trade-off between competing on the open market and competing on the politics of race credentials.

It is in this trade-off between market competition and political competition that BEE’s ironic nature lies.

Under BEE, investors are no longer free to direct money to those entrepreneurs who are best able to manage the economy’s capital structure and create the most wealth. Therefore, BEE redistributes ownership of the capital structure, through a process of political favouring, from better to worse entrepreneurs. Consumers, for whom all goods and services in the end exist, are harmed by the relative abundance of worse entrepreneurs, who produce less suitable and more expensive consumer goods than could have been the case.

In the end, BEE cannot speed up economic growth, the reduction of inequality or general black empowerment. Measured for their access to consumer goods, almost all South Africans, including black people, are poorer thanks to BEE.

BEE’s only winners are those politically favoured members of a black elite and other political opportunists (including – in the language of the South African government – white, coloured and Indian people) who manage to exploit this artificial system.